A creditor can attain a secured position without raising suspicions or being conspicuous by following the procedure outlined in this article. Due to the recent changes of Article 9 under the Uniform Commercial Code the procedure is easy and simple. No longer is it necessary to require a debtor’s signature on a UCC-1 Financing Statement. A UCC-1 filed with the Secretary of State is the only document required to become secured. The primary reason for a Security Agreement is to for the creditor to define “default”, whereby the creditor can implement legal remedies without debtor interference. This can also be accomplished by means of specified text included in a credit application. If you have a signed credit application and, if worded as follows, the credit app can be used as a Security Agreement.  This eliminates the need to obtain the debtor’s signature on any other documentation and gives the creditor the choice of becoming a secured party or establishing a Purchase Money Security Interest both at the creditor’s choosing. To become secured we recommend the following text in the Credit Application:


Applicant agrees to all invoice terms, conditions and provisions of all other transaction documents, which are deemed a part of this application. Applicant grants creditor the option to acquire a Security Interest in which this application or copy thereof may be used as a Security Agreement. Past due amounts are subject to service charges of 1 ½% per month, collection costs, and attorney fees. All claims are void unless submitted in writing within ten days of ship date. The seller’s liability is limited to credit or replacement of product.


If a debtor’s financial condition changes, with the above referenced provisions the creditor can become secured at any discretionary point in time. Provided “Notices” are sent to previously existing secureds then the basic requirement is met to fulfill a Purchase Money Security Interest (see “Notice” example at our website link entitled WWI RECOMMENDED PROCEDURE FOR FINALIZING A PURCHASE MONEY SECURITY INTEREST).


If you choose to become a secured party without a Purchase Money Security Interest then we would recommend the following text to be included in the UCC-1 Financing Statement:


“All inventory, cash in bank accounts, accounts receivable, chattel paper, real estate, collateral proceeds and collateral products.”


If a creditor desires a superior secured position over pre-existing secured creditors to the extent of repossessing its inventory then the following language needs to be included in the UCC-1 Financing Statement to satisfy the requirements of a Purchase Money Security Interest.  Such a provision would protect you to the extent of all of your merchandise that you have shipped to the debtor. To satisfy a Purchase Money Security Interest position, the following text for the UCC-1 Financing Statement is recommended:


“All inventory of the debtor acquired from the secured party or hereafter acquired from the secured party, as well as accounts receivable, chattel paper, proceeds of collateral and products of collateral from the sale of such inventory. By “Notice” to pre-existing secured parties of record, the secured party has perfected a Purchase Money Security Interest.”


To be both secured by virtue of a Purchase Money Security Interest and in the traditional manner of being a secured creditor, simply combine both recommended texts and include it in the collateral section of the UCC-1 Financing Statement.


A creditor’s secured position becomes official when it is recorded at the Secretary of State’s Office in the state where the debtor has its principal place of operation. Being secured or perfecting a Purchase Money Security Interest is certainly preferable over being grouped in the category of unsecureds. The Purchase Money Security Interest does not become perfected until all existing secured parties of record receive the “Notice” and after the credit application has been recorded as a Security Agreement with the Secretary of State.  The pre-existing inventory would not be covered but after the PMSI requirements have been met, then from that point on, subsequent debtor inventory would be covered under the Purchase Money Security Interest. Subsequent debtor purchases are automatically covered and thus no need to repeat any steps.


If a creditor chooses to become secured exclusive of a PMSI then the date and time of the UCC-1 Financing Statement and Security Agreement recording at the Secretary of State’s Office (the credit application) will define the pecking order of all the secureds.


The above-described methods of becoming secured do not hold the principals personally liable in the event that merchandise is “sold out of trust.” If this aspect is important then require the principals of the company to execute and sign the “Conditional Continuing Personal Guaranty” found in the WWI RECOMMENDED PROCEDURE FOR FINALIZING A PURCHASE MONEY SECURITY INTEREST (PMSI).


It is no longer a difficult task to become a “secured” creditor and the debtor no longer has to bother filling out forms.  All that is required is some type of debtor acknowledgment allowing a creditor a secured interest. This is accomplished by reference in the credit application.


If you have any questions, please contact Williams & Williams.